Know how and when to start saving

In the wonderland of personal finance, it always pays to start from the scratch. But before that let me tell you some common issues I have faced during my long years in personal financial services. 

Very often, people say “Aare where is the money to invest after all the expenses?” Mr Anup, a 28-year old executive, will hardly be ready to listen to an insurance salesman. 

Mr Sharma listens to an office colleague who claims to have made a lot of money in stock market and Sharma puts his hard earned money on tips shared by his colleague. Bad news hit the market and he finds his Rs1 lakh shrinking to Rs 48000. He is disillusioned.  

These are real life experiences, I have faced.  

In most cases, the problem is people do not have a clear vision of what they want to do with their money once they start earning. Yes they have wishes, dreams but no roadmap. Often they are caught in “Get rich quick” temptations.  
 
With advertisers being increasingly aggressive (to some extent seductive), one fails to discriminate between needs, wants and desires. One needs to have a serious look at his personal finance depending on his age, earning and responsibilities. A young person with no responsibilities can take risk but a middle aged person with children, aging parents cannot take the same risk. And after all one also needs to build a sizable corpus for golden years (retirementdays). 

Understanding cash flow in and out 

As I said before, let us begin from the scratch and understand how  money comes in and how it goes out i.e., cash flow-in and flow-out. 

To make it simple, I will take the case of a salaried person.  In the beginning of the month he or she gets a salary that is money comes in to his account (nowadays mostly zero balance accounts). He pays the rent (assuming he is staying in a rented house), keeps money for his daily expenses (grocery and provisions, maid, electricity and so on, pays for tuition fees, pays loan installments (if any). After that he may have some money still left in his or her account.  

If money lies in your account, you may get a call to keep the money in FD or invest in mutual fund and other saving instruments (banks are very watchful). 

This is the traditional cash flow pattern of an ordinary person: Income – Expenditure= Saving 

We suggest you move to “Income - Saving = Expenditure” and start managing your money. It’s easier said than done. Since you have a rough idea of your monthly expenditure …please keep aside part of your salary and spend the balance. You may have a problem in the beginning but gradually, you will get used. You may have to draw from your savings and meet  the expenditure. However if you find you are unable to save, you have to revisit your  expenditure. Actually you are living on a month to month basis.  

The first milestone 

You need to save 10 per cent to 15 per cent of your salary (you can make adjustment for PF deduction) but you need to save at least 8-10 per cent of your take home salary. It will be better if you open another account for expenses (since banks are moving digital, it won’t be very difficult to manage two three accounts). Where both the couples are working, both can transfer money to expense account as per mutual understanding leaving salary account in individual names. It will take some time to get into this discipline…. but please note money is a serious matter.  A good planning helps. Many people could shift to the above arrangement in 5/6 months after initial hiccups. 

The safety net 

Once you have a grip on your cash flow you have to think of uncertainties and you need to create a safety net for that. For some reason, you may have to leave the present company or you are without a salary for a couple of months….so your cash inflow stops and outflow remains.  That’s when your safety net will help you to manage your lifestyle.  Many people have gone through this crisis, especially during pandemic.  But the question is how much money for safety net? 

Actually it will depend on a few factors. Like if you are young and no one is dependent on you it will be very low but if you are middle-aged with children and aging parents and staying in a rented apartment the requirement will be high. If both the partners are working it will be less. 

Earlier four to six months of expenses (living expenses, rent and loan installments) were adequate for people below 35-40 years. But being conservative and with the experience of pandemic I will say 12 months  should be minimum. However if both the couples are working it may be less. 

Savings 

Once you get into the habit of savings and you are willing to build a safety net, the question is where you should save. The good old FD (Fixed Deposit) is a good choice. In case you are familiar with mutual fund (we will discuss about MF later) then you can keep the money in some short term debt funds. In case you are putting in fixed deposits, make a couple of FDs of different amounts and duration. This will help you to break one FD (depending on your requirement) while other FDs will earn interest. You also need to take taxability of FD interest income/or investment in short term debt funds into account. So if you have not created the safety net, start working on it and if you have already created the safety net then you have started taking care of your personal finance. 

By Binodgopal Mukherjee

An alumnus of IIM Kolkata and has more than 30 years of experience in financial services and has worked with different companies like Karvy, Motilal Oswal and Religare Securities. He resigned from Religare as Associate Vice President and joined academia to pursue his passion. He has wide experience in personal finance and investment domain.

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